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It’s like pulling teeth trying to convince growth investors that valuation matters. Price and value, the two opposing ideals which drive equities often seems to be devoid of logic whenever I see stocks such as Salesforce.com and Amazon carry on to grossly absurd levels. It makes me think that if the market had any brains at all tech giant Apple should easily be trading at a $1,000 by now. After all, how many companies can boast about having $30 billion in cash and zero debt?

Promises Don’t Always Yield Value – It Doesn’t Make Sense

Image via CrunchBase

Nonetheless, for some investors, it seems when assessing Apple’s fundamentals, which includes an embarrassingly low P/E ratio of 9, these either matter or they don’t. But to those who understand value, it makes Apple the cheapest stock on the market today. But I’ve never been one to accuse the market of ever making sense. Otherwise stocks such as Chipotle Mexican Grill would never have reached $442, regardless of how great their burritos are.

However, in some cases there is justification – Amazon being one of a handful of exceptions. While the company enjoys enormous growth prospect as evidenced by its forward P/E of 127, Amazon is able to affirm investor’s confidence with each passing quarter – spanning back at least five years, during which it has not averaged a P/E of less than 80. That’s all well and good, but what happens when the growth stops? Investors are left with a situation such as Chipotle, which has now lost almost 50% if its value.

How is it that Salesforce.com, which has 1-thirtieth (1/30th) of Apple’s cash and over half billion ($558 million) worth of debt and pays no dividend can enjoy a P/E of 72, one that is 8-times higher than that of Apple. What’s more, Salesforce.com is not even profitable. Whereas each quarter Apple earns enough profits to make the U.S. treasury blush. Nonetheless, the company’s stock absorbs a brutal punishment each time its P/E ratio reaches 17 - It doesn’t make sense.

In other words, if the market was efficient Apple would be at $1,000 per share. That’s of course if all things were equal. But clearly it’s not, because evidently valuation doesn’t matter. Not every company’s promise is returned in value – at least not to the extent that Apple has proven over the past couple of years with its limitless execution.

In Apple’s most recent quarter, nothing really changed. The company earned $8.2 billion, or $8.67 per share on revenues of $36 billion – surging 27% year-over-year and enough to beat analysts’ estimates. But investors were left disappointed that profits grew by (just) 23%. Allow that to marinate for a second. For some, it mattered very little that Apple sold almost 30 million iPhones, which represents a unit growth of almost 60%.

Likewise, iPad sales, which grew by almost 30% as it maintained its market lead was not enough to satisfy the bears or even the most ardent bulls. But somehow, that the company missed EPS estimates by the slimmest of margins implies that Apple can no longer innovate. Never mind that Apple’s gross margins arrived at 40% and helping the company generate over $41 billion in net income. Remarkably, the company is able to log these impressive numbers even as Google, Microsoft and Samsung all try to put it out of business.

Still, Apple continues to figure out ways to stay ahead of the competition. That Google and Microsoft have entered the tablet race is yet another example of how Apple continues to force its rivals to play “Simon Says.” In the process, they don’t realize that as they work to play catch-up, the gap only widens. This is a point that was made in a recent article, which discussed the current state of Research in Motion and the significance of its long-awaited BB10 operating system.

Bottom Line

As soon as Apple is thought to be figured out, the company moves in a completely different direction. As companies such as RIM and Microsoft are just catching on, Apple is off creating new markets and like a roman army, it will continue to take over others – whether it is the mini tablet market or music streaming, which has started to worry Spotify fans as well as investors of Pandora. The company’s mission above all else is to leverage its ecosystem and increase shareholder value.

That Apple’s stock has dropped of late, means very little to the company’s long-term narrative. This is even though it has caused rivals to prematurely proclaim victory. Which is another reason that I continue to think that the stock market is not as smart as the masses think it is. If it were, Apple would be trading at $1,000 where it belongs.